United Kingdom

The UK's economy is likely to have to narrowly sidestepped a recession in 2023, though the economic outlook remains far from optimistic, reflected in subdued confidence among consumers and businesses alike. The external environment has been a recent drag, with exports remaining below prepandemic levels, an outlier among G7 countries. A bright spot has been the resilience of domestic demand, particularly from consumers buoyed by significant savings amassed since the pandemic but also strong consumer credit growth, which builds up risks in the medium run. This buffer has propped up an economy that leans heavily on private consumption amid a tough international environment, helping it surpass its prepandemic real GDP by close to 3%. Moving ahead, this domestic cushion may thin, undermined by falling real wages over 2022-23 and negative wealth effects, pushing consumers to save more. While we expect the UK to avoid a full-blown recession, GDP growth will remain low at +0.6% in 2024, followed by +1.5% in 2025.

While inflation is gradually trending downwards, it continues to linger significantly above the BoE’s target and a return to below 2% is not expected before 2025. This sluggish decline stems in part from ongoing pressures in the services sector and a labor market that – despite signs of cooling – remains tight. Wage increases in the UK, which have surpassed those of peers, fuel the risk of a wage-price spiral. In the context of these ongoing inflationary pressures, it is anticipated that interest rates will stay higher for longer with no foreseen rate cuts until Q4 2024.

After a hiatus during the pandemic, corporate risk in the UK is back with a vigor as insolvencies are set to remain 30% above prepandemic levels. Unlike their European and American counterparts, which are grappling with diminishing margins, UK companies have showed resilience, managing to grow their margins even amidst the pressures of increasing labor costs. Nevertheless, this resilience is counterbalanced by a concerning trend of reduced corporate cash reserves. The outlook ahead is sobering, with forecasts suggesting a continued uptick in annual insolvencies in 2023 as well as 2024.

Political volatility may be on the horizon in 2024. Under Prime Minister Rishi Sunak, who assumed office in October 2022, the Conservative Party has made modest gains in opinion polls but still significantly trails the Labor Party. The next election, expected in late 2024, is likely to be a challenging one for Sunak and the Conservatives. Forecasts are currently pointing towards a Labor victory, with a narrow but absolute majority. A transition to their governance will likely bring an initial honeymoon period of public goodwill. However, maintaining this support will depend on their capability to effectively tackle the country’s economic and social challenges.

In this evolving political landscape, policy towards investment remains favorable and the UK maintains an overall probusiness policy stance. Despite the rise in corporate tax from 19% to 25% in 2023, the UK’s rate is still lower than that of the EU’s largest economies. However, Brexit has worsened the UK’s terms of trade, notably as foreign direct investment has adjusted on the downside and the sterling has suffered from a strong depreciation.

The UK continues to negotiate further trade agreements post-Brexit, seeking to strengthen its global trade network. A notable advancement is an anticipated Free Trade Agreement (FTA) with India, though negotiations remain ongoing. This effort is part of a broader strategy as the UK adapts to new trade dynamics outside the EU. A number of FTAs have been established in recent years, including with Australia (December 2021) and New Zealand (February 2023). In addition to these, the UK joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in July 2023, linking it with an important Asia-Pacific trade bloc of 11 countries. In the digital trade sector, the UK has finalized agreements with Singapore, effective from June 2022, and with Ukraine, signed in March 2023.